In Integrating Sun, Oracle Bets Big on a New Sales Strategy

At first it seemed like bad timing. Oracle (ORCL) CEO Larry Ellison found his company going virtually head-to-head with Apple (AAPL) CEO Steve Jobs in dueling webcasts announcing major tech news on Jan. 27. It was no contest: Apple's iPad launch party easily overshadowed Oracle's get-together to highlight the completion of its $7.4 billion acquisition of Sun Microsystems -- so much so, that it appeared as if Oracle had made a rare publicity blunder. But maybe not.While both events had been expected for months, Apple's announcement answered many questions about a highly anticipated product. Oracle's merely confirmed something that was largely a foregone conclusion, while raising questions about the company's strategy to integrate the two companies. By staying out of the headlines, Oracle deflected some criticism of its strategy and kept attention off some of its customers' concerns.

Ironically, Oracle's inability to sell its big announcement as a major news event may have kept its stock price from tanking. This comes at a time when the company is making a wholesale bet on its ability to sell itself and its newly acquired Sun products to an ever-growing customer base.

Not Much Clarity

During a separate analysts' conference call, also on Jan. 27, Oracle spent a lot of time discussing cost-cutting and sales strategies that would improve profitability, but it gave scant earnings data and guidance for the acquired Sun Microsystems that would provide a clearer picture of what the combined company might return to investors in the next quarter. None of this seemed deliberate, but it caused some uncertainty among Sun's hardware customers who fear their products may not be supported and investors who question whether Oracle's strategy to run Sun's software and hardware operations will be effective.

By midday Friday, Oracle's stock price had dropped from $23.88, where it began on Jan. 27, to $23.43.

Analysts are largely behind Oracle's move to expand its business model from primarily software into hardware, allowing it to take on competitors in both markets.

"The acquisition will enable Oracle to eliminate its prime competitor, Sun Microsystems, and help the company compete against International Business Machines (IBM), its biggest database software rival, as well as Hewlett-Packard (HPQ) and Cisco Systems (CSCO)," said an analysts' note from Zacks Equity Research. The report also said, "The acquired business will contribute over $1.5 billion to Oracle's non-GAAP operating profit in the first year, increasing to over $2 billion in the second year."
Will Customers Say "Ouch"?

While all of that sounds great, Oracle plans to eliminate third-party providers for Sun products and sell the products with its own sales team. Also, during the analysts' call Chief Financial Officer Jeff Epstein announced that instead of offering a uniform commission to salespeople for all products, they'll earn higher commissions for selling higher-end products. The new strategy heavily relies as well on ever-increasing maintenance fees. But this and the focus on high-end products could cause customers short-term pain in a tough economic environment.

"When we compensate our salespeople based on margin, they're going to figure it out pretty quickly," Epstein said, adding, "We think they're going to sell a lot more of the high-margin products and many fewer of the lower-margin products. And that will dramatically change the revenue profile overall."

Some analysts suggest that customers may balk at losing the sales providers they've worked with for years, and resist pressure to pay more fees or move to higher-end products as they implement cost-cutting of their own.

Wait and See on Software-as-a-Service

Additionally, Morningstar's Rafael Garcia forecast another potential problem for Oracle in an analyst note: "Small providers of software-as-a-service (SaaS) solutions, such as salesforce.com (CRM), have proved highly popular among certain customer segments. While Oracle is now offering a growing range of its applications under the SaaS model, the firm has mostly adopted a wait-and-see approach while the economics of this new paradigm -- which at this point aren't necessarily stacked in Oracle's favor -- evolve."

But Oracle isn't waiting to install the new sales strategy it announced on Wednesday. Given the rumbling the new approach could potentially cause among customers, maybe it is better for Ellison & Co. to have gone unnoticed during iPad-mania day.